Despite the continuing economic challenges of the COVID-19 pandemic and the rise of e-commerce, the national retail vacancy rate is expected to see a slight decrease of less than one per cent by 2024, a new report by Colliers International predicts.
The report states growth in e-commerce is unlikely to significantly impact the total amount of retail space required.
“While e-commerce continues to grow, with expectations it could reach around 10 per cent of total retail sales in 2024, brick-and-mortar sales continue to grow as well,” says the report, titled Friends, not foes: E-commerce, brick and mortar, and the future of retail.
“As retailers battle with e-commerce’s limited profitability, they are keeping their stores, yet at the same time reconfiguring the physical unit to accommodate omnichannel sales.
“Our forecasting model predicts that national retail vacancy is expected to remain stable at current levels, approximately 8.5 per cent nationally, over the next two years. Our model accounts for growth in economic, retail sales, population and tenant side demand.
“We asked retailers whether the pandemic has changed the importance of physical retail space for their business, and if so, how much they would like to increase or decrease the amount of space they lease. In response, retailers said they are satisfied with the amount of space they currently lease. Those surveyed anticipate, on average, a total reduction of space of less than one per cent.”
Retail continues to ride out pandemic
Jane Domenico, senior vice-president and national lead, retail services for Colliers in Canada, said retail has fared better than most people outside of the industry might think during the ongoing COVID-19 pandemic.
She said retailers have shown they can pivot and change during the crisis of the past couple of years – it’s an ability at the core of a successful retailer.
“People have been saying the death knell of retailers and brick-and-mortar retailers. Our title (of the report) is intentionally grabbing, because e-commerce is a friend of bricks and mortar and it’s a friend of retailers. It’s not foes,” Domenico said.
“We talk about omnichannel as an industry and it’s not just retailers, it’s also the landlords.”
The hardest-hit retailers have also had the support of government programs during each new wave of COVID.
“The government is enacting this for the good of society and they need to help those businesses, and landlords will continue to work with our retailers. I always say your asset is only as good as the health of your retailers,” added Domenico.
New balance between e-commerce, brick and mortar
That means continuing to adapt to the changing retail environment. Domenico said property owners and managers must provide retailers with appropriate spaces to accommodate in-store pickup of online purchases and improved customer experiences.
The Colliers report states that while e-commerce sales continue to grow from the current figure of about seven per cent of total sales, brick-and-mortar sales continue to grow as well.
“As retailers battle with e-commerce’s limited profitability, they are keeping their stores, yet at the same time reconfiguring the physical unit to accommodate omnichannel sales,” it said. “E-commerce and brick-and-mortar retail are no longer mortal enemies.
“Retailer adaptations through the pandemic have shifted the industry away from a ‘zero sum’ forecasting relationship between growth in e-commerce and brick-and-mortar space needs.”
Domenico said successful retailers are increasingly using their back-of-store space for e-commerce platforms and an omnichannel experience.
“As developers, we’re changing the use of some of GLA (gross leasing area). So, in a mall that might have a vacancy rate, I bet you that there’s a residential play or an old age home or something that is a different-use category than what we currently have going on in that shopping centre, that enclosed mall, or that necessity-based retail centre,” she said.
“For tenants, their space requirements for their e-commerce platform . . . they’re actually going and looking for industrial space.”
The report says 16 per cent of retailers are leasing, or plan to lease, industrial space to help with online order fulfillment.
Accommodating omnichannel in stores
Many more have plans to use their stores to fulfill online orders. Higher e-commerce sales are leading 55 per cent of retailers to reconfigure existing physical units, increasing physical space reserved for inventory (back-of-house) and decreasing consumer sales areas (front-of-house).
Colliers said the forecasted growth in total Canadian retail sales over the next four years is attributable to an increase in both e-commerce and brick-and-mortar sales.
It reports 60 per cent of retailers are using and configuring their physical units for multiple selling touchpoints, including online order fulfillment and “buy online, pickup in store” (BOPIS).
“Omnichannel retail will become less of a choice for retailers and landlords in the future. Consumers expect a seamless retail experience, whether they are shopping online, in-store, or a combination of both. Omnichannel retail will drive synergies between all potential points of sale,” it said.
“According to our survey, 57 per cent of retailers say that e-commerce allows them to sell more products, yet only seven per cent indicate that online sales are more profitable than in-store sales.
“Through omnichannel retail, the benefits of each channel can be realized. For example, retailers who indicate that online customers spend extra when they BOPIS believe the average extra spend accounts to about 31 per cent of the original order.
“Omnichannel retail is becoming more important for retailers to embrace and landlords to support.”
Domenico said landlords need to ensure they continue to support and enhance the ability of retailers to provide an omnichannel experience for consumers.